Altria Reaffirms Guidance, Provides Business UpdatAltria Reaffirms Guidance, Provides Business Update
Bull Market Report
Published 2/18/09
Altria (MO, $15.53, -0.04) reaffirmed this morning that it expects to post full-year profits in the range of $1.70 to $1.75 per share, which would represent growth of 3% to 6% over a 2008 profit of $1.65. The company made the announcement prior to an appearance by its chief executive and chief financial officers at an investment conference in Florida.
CEO Mike Szymanczyk and CFO Dave Beran provided an update on the company that was focused on its tobacco businesses. Altria is now in the wine business through its acquisition of UST, which owned the premium wine maker St. Michelle Wine Estates. It also has a 28.5% stake in SABMiller.
Overall, the presentation was an extension of remarks the company made when it released its Q4 2008 earnings results, but management was able to offer a little more clarity on its strategy for integrating UST's smokeless tobacco operations into Altria, which now has three tobacco businesses: Phillip Morris USA in cigarettes, the U.S. Smokeless tobacco segment, and John Middleton in the machine-made cigar segment.
Szymanczyk said there are an estimated 60 million adult tobacco consumers in the U.S., or approximately 26.6% of all adults. It is a number that has remained relatively constant in recent years. While cigarette industry volume decline rates have accelerated to about -4% per year, smokeless tobacco and cigar volume growth have offset much of the drop, growing approximately 7% and 4%, respectively, hence the recent acquisitions.
Cigarettes remain the largest category with an estimated $70 billion in industry-wide retail sales. Smokeless tobacco is No. 2 with about $4 billion in retail sales, while machine-made large cigars sold an estimated $3.4 billion last year.
Phillip Morris USA, paced by its industry leading Marlboro brand, had a 50.7% retail share and an estimated 56% share of total profits last year, Szymanczyk said. U.S. Smokeless had a 57.4% market share, while John Middleton grabbed 29.1% of machine-made cigar sales.
As part of its cost-saving strategy, Szymanczyk said tobacco managers will focus on brand management and manufacturing. Their efforts will be supported by three central service operations created as an outgrowth of the UST acquisition: Altria Client Services; Altria Sales & Distribution Services; and Altria Consumer Engagement Services.
Client Services will handle Finance, Human Resources, Information Services, Purchasing, Law, R&D, Government Affairs, and other general and administrative support functions. Sales & Distribution Services will be created by combining the sales forces from PM USA and U.S. Smokeless, but they will sell all categories of tobacco. Consumer Engagement Services will handle marketing and related functions.
"We expect this new (sales) organization will provide increased retail store coverage and better execution at retail, including improved product freshness, better merchandising, and more effective management of promotions," Szymanczyk said.
Looking ahead, the company remains focused on taxes. The recent passage of the federal government's Children's Health Insurance Program contained another boost in the federal excise tax on smokes, but Szymanczyk said the law also had an upside: the legislation harmonized the tax rates on cigarettes, little cigars, and roll-your-own tobacco products. Little cigars and roll-your-own tobacco products previously enjoyed lower taxes.
Altria will also lobby states to eliminate ad valorem tax models on smokeless products, which charge tax based on a percentage of the price. Altria argues ad valorem taxes are unfair to premium-priced products and rob states of revenue; under a weight-based model used by some states, cans of equal weight are charged the same tax, regardless of the price of the product set my the manufacturer. This is now one of the company's top lobbying efforts in state legislatures.
BMR Take: Altria set its guidance
three weeks ago when it reported its year-end results. At the time, we called its outlook "appropriately cautious." The fact the company didn't adjust its outlook lower less than a month after issuing it was considered a plus by investors today. Altria's strong market position in the three tobacco segments in which it operates, its ability to reduce costs, and its ability to generate strong cash flow make this a solid holding for a weak economy. The dividend is about as secure as dividends get, especially since the company suspended its share repurchase program this year as a precaution. With the stock trading more than a dollar per share lower than at the time earnings were released in late January, the dividend yield has grown to 8%. Income-oriented investors should consider the stock on weakness.